KoppCo, a U.S. based manufacturer of winter sports equipment, has just started selling its products in Switzerland. KoppCo management is concerned about the company’s foreign currency exposure, as they expect a large amount of sales denominated in Swiss francs. Koppco could best hedge its exposure to Swiss franc/US dollar exchange rates by: a. buying call options on Swiss franc futures. b. selling call options on Swiss franc futures. c. selling Swiss franc futures. d. buying Swiss franc futures
C) Selling Swiss franc futures. ??? if we are expecting SWISS-FRANC and want to hedge the downward movement of the currency in the near future, we would SHORT a SWISS-FRANC FUTURE. Since we would like to sell the SWISS received in the future at a fixed currency rate now. - Dinesh S
C? Haven’t looked at Derivatives at all yet, so I may be way off base. But, here is my thinking. If you are collecting sales in SFr, you are going to open up FX exposure. By having a future contract, you can sell you SFr at a locked in rate. Assuming your sales forecasts are somewhat reliable, it seems like a decent strategy. People, feel free to poke holes in this like swiss cheese.
C
definitely c
what is there was a choice e. buying put options on Swiss franc futures. would this be a better hedge then choice c. I think yes. comments?
My guess is C becuase it is a US company selling products in Switzerland. Eventually the money received in sales, which is denominated in Swiss Francs, must be converted to US Dollars. The company needs to protect itself from the Swiss Franc declining in value compared to US dollars, so to hedge it’s bets, the company can go short swiss francs, hence: sell Swiss Franc futurues. Hope I’m right, hope this helps.
Given a choice between the following 2 positions 1. SHORT FRANC FUTURES or 2. going LONG on PUT CALL OPTIONS I would still take up the SHORT position in a FUTURE as there we don’t need to pay any initial amount/depost to get into the contract but for jumping on to the LONG side of an CALL OPTION would demand a put premium to be paid to the seller of this PUT. So basically in case-1 he wins by just the premium whilst case-2 has a higer breakeven Am I talking any sense? … it’s 3 already 
- Dinesh S
>put call option? =) The option would be beneficial only if eventually the SFr would gain strength offsetting the price of an option. And the question asks about the best hedging - if you expect the strengthening I’d go with option. am I wrong?
dinesh.sundrani Wrote: ------------------------------------------------------- > Given a choice between the following 2 positions > > 1. SHORT FRANC FUTURES or > 2. going LONG on PUT CALL OPTIONS > > I would still take up the SHORT position in a > FUTURE as there we don’t need to pay any initial > amount/depost to get into the contract but for > jumping on to the LONG side of an CALL OPTION > would demand a put premium to be paid to the > seller of this PUT. So basically in case-1 he wins > by just the premium whilst case-2 has a higer > breakeven > > Am I talking any sense? … it’s 3 already > > - Dinesh S I think you should sleep, because you have started using Put and Call synonymously 
On a serious note with the future position you limit both the upside and downside…while with the PUT you just limit the downside , with an unlimited upside potential, for a small premium. Or are the two nor comparable?
reema Wrote: ------------------------------------------------------- > dinesh.sundrani Wrote: > -------------------------------------------------- > ----- > > Given a choice between the following 2 > positions > > > > 1. SHORT FRANC FUTURES or > > 2. going LONG on PUT CALL OPTIONS > > > > I would still take up the SHORT position in a > > FUTURE as there we don’t need to pay any > initial > > amount/depost to get into the contract but for > > jumping on to the LONG side of an CALL OPTION > > would demand a put premium to be paid to the > > seller of this PUT. So basically in case-1 he > wins > > by just the premium whilst case-2 has a higer > > breakeven > > > > Am I talking any sense? … it’s 3 already > > > > - Dinesh S > > > I think you should sleep, because you have started > using Put and Call synonymously > On a serious note with the future position you > limit both the upside and downside…while with > the PUT you just limit the downside , with an > unlimited upside potential, for a small premium. > > Or are the two nor comparable? oops, I obviously meant “going LONG on PUT OPTIONS”. Anyway’s I’ll take your advice…
Agree with C Also going long on the put option would give the chance of a bigger profit at a cost So I guess it really depends what they expect. If they expect the swiss to become stronger but still want to reduce risk than I would go with the option.If they expect the swiss to go down then I would go with the forward contract
First, the expectation of a winter sports manufacturer about the direction of Swiss Franc doesn’t sound relevant at all to me. Who cares what they think? All derivatives are priced off the forward rate which is the best estimate of the future expected price that the sports company is likely to get. If a company is trying to hedge to reduce balance sheet vol, a futures contract is much better than a put option (btw - FX puts are more liquid than FX futures puts) because the delta of the put option is changing all the time when the currency moves. If the company is exposed to a fixed amount of FX risk than a futures contract reduces that to 0. Of course in this case, one futures contract isn’t exactly right either because they are trying to hedge a series of projected sales.
I say…sit tight why bother hedging…$ is tanking anyway…